Chinese Pharmaceutical Cross-Border M&A in 2022

Adam Zhang Yu

The Chinese pharmaceutical market shapeshifted dramatically last year. As such, here are some elements to consider for companies looking to enter the Chinese pharmaceutical M&A market in 2022:

Licensing deals will become more popular

The total amount of in-licensing surpassed $13 billion in 2021. Notable deals included Zai Lab’s in-license of up to four immuno-oncology molecules from MacroGenics, with a potential deal size of $1.4 billion, and Hansoh Pharma’s in-license of siRNAs for three undisclosed targets from Silence Therapeutics, with a potential deal size of $1.3 billion. From the perspective of therapy areas, oncology is the most popular field.

In 2021, there was a total of 53 outbound out-licensing deals, far exceeding the 24 deals in 2020.¹ More and more, Chinese R&D pipelines are being recognized by international pharmaceutical companies. We can expect more of such deals to happen this year. Major out-licensing deals in 2021 included BeiGene’s up to $1 billion licensing out of its immunotherapy pipeline ociperlimab to Novartis, and Rongchang Biology’s up to $2.6 billion licensing out of vidicizumab to SeaGen.

Embracing CROs and CMOs

Chinese pharmaceutical companies are penetrating the global pharmaceutical outsourcing market and increasing their market presence through acquisitions. In February 2021, WuXi AppTec announced that it had reached an agreement with Bristol Myers Squibb to acquire its manufacturing facility in Couvet, Switzerland, to expand WuXi AppTec’s CDMO capability and business coverage in Europe. At the beginning of 2022, Pharmaron acquired a commercial API manufacturing facility in the UK from Recipharm to enhance Pharmaron’s CMC capabilities in the UK and China. These transactions are just examples of the fast-growing Chinese CRO and CMO market, reflected in a CAGR of 30.8% from 2016 to 2021, much higher than the global average of 9.5%.²

The continued raising of capital in the life sciences

In 2021, the total investment in life sciences reached $17 billion in China, an increase of 26% over 2020, in which early stage (A and B round) investment accounts for approximately 40% of the total.³ Investments focus on the areas of biotechnology, R&D pipelines, synthetic microorganism technology, vaccines, precision medicine, and antibodies. International life sciences venture capitals, such as OrbiMed, Vivo Capital, Arch Venture Partners, and Lily Ventures, are increasing their investment weight into the Chinese life sciences space and are deeply involved in key milestone events. It’s expected that other targets will be available for acquisition soon, given the emergence of many life sciences companies and the wide spectrum of their pipeline coverage.

International companies’ changing market strategy in China

The implementation of the nationwide centralized drug volume-based purchasing policy impacted international pharmaceutical companies’ strategies in China. In addition to innovative drugs, international pharmaceutical companies used to have strong competitiveness in the Chinese market for expired patented and high-end generic drugs. Under the new procurement policy, their pricing strategies also have undergone major changes, with some even exiting the market. Mundipharma, owned by the Sackler family, has kicked off the sale of its China business in a deal that could fetch more than $1 billion.⁴ BMS canceled one subsidiary and suspended the sales of 12 medicines in China as a response to the impact brought by the changes of the policy in China. Japanese Takeda Pharmaceutical sold five prescription products to China's Hasten Biopharmaceutic in a $322 million deal. More and more multinational pharmaceutical companies are currently reviewing their market strategies in China, and we can expect more M&A activities from multinational pharma this year.

Less support from underperforming Chinese capital market

China’s large-cap CSI 300 Index fell roughly 5% for the year 2021. Hong Kong, home of numerous Chinese tech and other giants, saw its Hang Seng Index dive almost 15% in the same period. The MSCI China Index ended the year 37% percentage points lower than comparable major indexes.⁵ Without the strong funding supports from the domestic capital market, Chinese pharmaceutical companies will need to think about other financing options to support their outbound M&A activities. Larger pharma companies that are listed in multiple capital markets, such as in the US and Hong Kong, will be in an advanced position to diversify their funding resources compared to their local peers.

COVID-19 slows down deal execution process

As China continues its zero-COVID policy, its international borders have effectively been closed, preventing almost anyone from getting in or out. Chinese companies have been missing opportunities, including transactions in pharmaceuticals, simply because Chinese buyers couldn’t perform effective due diligence of their targets due to the difficulty of international business travel.

Geopolitics impact the completion of deals

Pharmaceuticals can be linked to national security, directly or indirectly. When vaccines, antibiotics, and other drugs became difficult to access during the pandemic, it was understandable for authorities to pay more attention to pharmaceutical transactions involving Chinese buyers. This increases the uncertainty of the completion of transactions by receiving approvals from authorities.

Adam Zhang Yu, managing director, E. J. McKay & Co.

References

1. PharmCube: https://www.pharmcube.com/index/news/article/8585
2. Dongguan Security report: https://pdf.dfcfw.com/pdf/H3_AP202010131421045855_1.pdf?1602599477000.pdf
3. ASKCI: https://baijiahao.baidu.com/s?id=1722038694720341674&wfr=spider&for=pc
4. Reuters: https://www.reuters.com/article/us-mundipharma-china-sale-idUSKBN2CM0JO
5. Barron’s: https://www.barrons.com/articles/chinas-stocks-had-a-tumultuous-year-what-to-expect-in-2022-51640960489